The loss is staggering: From March 2000 to July this year, the value of the US stock market has fallen by US$3.7 trillion.
The bear grip will squeeze out the excesses in the US mutual fund industry, says John Bogle, founder of Vanguard Group, the second-largest US mutual fund manager, with US$570 billion in assets. After a 28-month, 41-percent plunge in the Standard & Poor 500 Index, the US$6.6 trillion fund industry is poised for a shakeout that could claim half of its 4,800 equity funds, he says.
While the S&P 500 has rallied 5.6 percent in August, its slump since March 2000 will also spur needed changes in the way companies manage and account for pension funds and stock options, investors say.
"The changes Wall Street faces are like a root canal," says Barry Barbash, who headed the Securities and Exchange Commission's investment division from 1993 to 1998.
Since 1990, the number of US funds has soared to 8,325 from 3,679, according to the Investment Company Institute. Total assets under management rose to a peak of US$7.3 trillion in March 2000 -- when the S&P 500 reached a record 1,527 -- from US$1.1 trillion in 1990.
In July, investors pulled US$31 billion out of US equity funds, according to AMG Data Services, which tracks the fund industry. Money managers such as Putnam Investments, FleetBoston Financial Corp and Merrill Lynch & Co are starting to consolidate or close funds that have posted slack returns.
"This is a seminal moment for the industry," Bogle says.
Many of the funds that sprang up during the bull market -- much like the dot-com companies they invested in -- have never made much money for investors, says Russel Kinnel, director of fund analysis at Morningstar Inc, a Chicago-based research company.
"Obscure funds with huge losses and no assets will never rebound -- even in a rally -- but of the 100 biggest funds, very few will go away," he says.
On average, US stock funds posted annual returns of 10.8 percent during the 1990s, according to the Investment Company Institute, compared with an 18 percent average annual gain in the S&P 500.
Stock market losses have hammered corporate retirement funds too. The unfunded liabilities of US corporate pension funds -- the difference between what companies expect to pay retirees and the amount of money they have on hand -- soared to a record US$111 billion in December last year from US$26 billion a year earlier, according to Pension Benefit Guaranty Corp, which insures pension plans for 43 million workers.
Billionaire Warren Buffett says companies need to curb unrealistic assumptions about their fund returns. Ford Motor Co, SBC Communications Inc and Verizon Communications Inc have said in SEC filings this year that they expect their funds to generate returns of 9 percent or better this year. Buffett called such forecasts "wildly optimistic" in a July 24 op-ed article in The New York Times.
RSS